Appendix 4: Correspondence with the Chancellor on transition
Letter from the Chairman to the Rt Hon Philip Hammond MP, Chancellor of the Exchequer, 8 November 2017
The EU Financial Affairs Sub-Committee is currently conducting an inquiry into the future of financial regulation and supervision following Brexit, with a view to producing a full report in early 2018. Nonetheless, we wanted to write to you ahead of this schedule to highlight the evidence we have received on the urgent need for an agreement on a standstill transition period as a priority for the UK Government in the negotiations.
Our evidence has been emphatic that, for the financial services industry to be able to continue the orderly servicing of cross-border clients, a transition period needs to be agreed by the end of the year. A transition period is a ‘wasting asset’, and banks and insurers will begin to put into effect contingency arrangements, in anticipation of market access being suspended in March 2019, in Q1 2018. The Secretary of State for Exiting the European Union, the Rt Hon David Davis MP, told the EU Select Committee on 31 October that “We would like an implementation agreement in the first quarter of next year—that being the earliest we could possibly get it—in principle”. Our evidence, however, suggests that leaving an agreement this late would result in a significant number of relocation plans being put in motion.
One critical aspect identified by our interlocutors is the issue of contractual continuity. Our evidence, from both industry and from the Bank of England, has indicated concern over the scale of novations that would be necessary in the absence of a reciprocal agreement to grandfather existing contracts. These concerns extend, inter alia, to insurance and derivatives contracts, if an agreement on contractual certainty is not reached.
Our witnesses are concerned that they cannot rely on a mere statement of intent; some witnesses said that such an agreement would need to be legally binding in order to be seen as trustworthy. How do you foresee a transition agreement being promulgated in order that UK and EU businesses can rely on it for the purposes of their business planning, regardless of the subsequent outcome of negotiations?
In light of the urgency of the topic, we have concluded that we should bring this part of our evidence to your attention and will welcome your speedy response.
Letter from the Rt Hon Philip Hammond MP, Chancellor of the Exchequer, to the Chairman, 2 December 2017
Thank you for your letter of 8 November concerning financial regulation and supervision following the UK’s withdrawal from the European Union. The government agrees with the Committee on the importance of minimising any risks of disruption as the UK withdraws from the EU, and maintaining the ability of the financial services industry to continue the orderly service of cross-border clients.
The government has been actively engaging with the UK regulators and with the financial services sector to understand how the UK’s withdrawal from the European Union could impact financial services firms and their customers. As your letter notes, a key concern is the potential impact of the UK’s withdrawal on cross-border financial services contracts in force at the point of exit.
As the Financial Policy Committee explained in its November Financial Stability Report, a withdrawal of permissions to conduct cross-border business following the UK’s withdrawal from the European Union could impair financial companies’ ability to perform or service outstanding financial contracts. This could affect both UK and EU27 financial services firms and their customers. The Financial Policy Committee judges that the largest identified risks relate to over-the-counter derivatives and insurance contracts. The government is considering all options for mitigating these risks.
The government is clear that an integral part of delivering our withdrawal will be the negotiation of a time-limited implementation period, to provide certainty and avoid a cliff-edge for business and individuals during the adjustment from the current structures of membership to the new relationship. The Secretary of State for Exiting the European Union has said recently that he believes an implementation period can be agreed very early next year, and that it is in the interests of both the UK and the EU27 to do so. An implementation period would mean that companies will only have to prepare for one set of changes, and also means businesses in both the UK and the EU27 avoid having to take any decisions before they know the shape of the final deal.
As the Prime Minister said in her speech in Florence, the framework for this time-limited implementation period can be agreed under Article 50. Furthermore, the Withdrawal Agreement and Implementation Bill will be introduced after the Withdrawal Agreement has been reached between the EU27 and UK. The Withdrawal Agreement and Implementation bill will contain the necessary powers to legislate for the implementation period.